Practical guidance on the National Mortgage Form
with Gordon Perkins, Special Counsel at Mullins Lawyers and member of the QLS Banking & Financial Services Law Committee
By now practitioners should all be using the National Mortgage Form (NMF) for mortgage transactions in Queensland. After 2 March 2018 the old form of mortgages (Form 2) will not be accepted for lodgement if it is not signed before that date. The National Mortgage Form is very different to the Form 2 Mortgage, there are some important issues relating to the preparation and use of an NMF that transcend the form itself.
Update on the National Mortgage Form
“Prepare yourselves, What you need to know about the National Mortgage Form” (see Proctor, November 2017) was written in September and edited before Land Titles Practice Manual (LTPM) Part 2A and the Queensland form of the NMF were published in early November 2017. Part 2A’s release date meant there was insufficient time for amendments to my earlier article to be published.
Part 2A generally does not allow Forms 20 (schedules, etc) to be used to expand information in an expandable panel. The two exceptions to that general rule are:
· Enlarged Panels for marksman executions by either mortgagors and mortgagees; and
· Schedules containing additional terms and conditions.
Update on the lodgement deadline
Titles Registry Alert 134 advised that from 1 January 2017 all mortgages must be executed on the NMF. The phrasing seems to be unfortunate as Title Registry Alert 139 later advised “the transition period during which Form 2 Mortgages can still be lodged has been extended until 2 March 2018”, which gives the impression that Form 2s cannot be lodged after 2 March 2018. The Registrar’s office has since confirmed that:
· until 2 March 2018 the Registrar will accept for lodgement both Form 2s and the NMF; and
· on and after 2 March 2018 the registrar will accept the NMF for lodgement, and only those Form 2s executed before Friday, 2 March 2018.
This position avoids the retrospective effect of a blanket ban on the lodgement of Form 2 Mortgages from 2 March 2018.
In practice, the Christmas break means that solicitors should be starting to use the NMF now rather than next year to minimise the risk of having to re-execute mortgages because none of the parties to the mortgage have signed the mortgage before 2 March 2018. On 1 March 2018 solicitors acting for mortgagees should ensure that all Form 2 Mortgages in their possession have been signed and dated by at least one party, whether or not settlement has occurred.
PEXA
PEXA also released the changes in release 7 of their system, allowing attachments to be lodged with an electronic NMF. This was to cater for additional terms and conditions, especially in Victoria where many mortgages can only be lodged electronically. That functionality is expected to be available in Queensland from May 2018.
Can minor amendments be made to an NMF?
LTPM Part 2A prevents Form 20s (other than those permitted Form 20s mentioned above) being used to include data that would otherwise be included in an expandable field in the NMF. Form 20s for other purposes, such as those required by the LTPM provision regarding minor corrections to dealing instruments (LTPM [59–2040]), may be lodged with an NMF.
Schedules of additional terms and conditions
Allowing schedules of additional terms and conditions means that practitioners can continue their practice of adding all of the mortgage covenants to a schedule to the mortgage. This is especially convenient for mortgagees in large transactions where the mortgage terms are often negotiated as it means they can use their existing precedents. The Registrar’s office commented that there is no need for a Form 20 containing additional terms and conditions if the Word version of the NMF on the Registrar’s website is used. They envisage Schedules of additional Terms and Conditions to be more likely when the practitioner uses the web version due to the character limit.
They also consider that the same formatting restrictions apply to the Additional Terms and Conditions field as apply to Form 20s. This means practitioners can use larger fonts for headings and use indentation to make the terms and conditions easier to read than if the Design Specifications are religiously followed. Paragraphs can also be indented. Readability is one of the factors considered by the Australian Consumer Laws in relation to standard form contracts for both small business and consumers; presenting easy to read documents is also a professional courtesy.
Design Specifications vs LTPM [59–200]
Practitioners may note that the margins in the NMF do not comply with the requirements of LTPM [59–2000]. The Registrar’s office has advised that:
· the National Mortgage Form Design Specification (Design Specifications) were designed by the Registrars of participating States and Territories to enable parties to prepare an NMF which would comply with each State’s requirements for the NMF; and
· the Design Specifications were intended for use by financial institutions preparing mortgages Australia wide — practitioners preparing a mortgage for Queensland should not need to look to the Design Specifications to prepare a mortgage.
As a result the LTPM and the form published by the Registrar take precedence over the Design Specifications. The LTPM and NMF are published pursuant to a statutory power, whereas the Registrar has not published the Design Specifications. Since the NMF published by the Registrar is more specific than LTPM [59–2000], the requirements of the NMF prevail. Consequently the margins used in the NMF are the correct margins for that form despite the left, right and bottom margins being less than those specified in LTPM [59–2000]. The NMF complies in all other respects with LTPM [59–2000] as that paragraph specifies minimum requirements.
The Registrar’s office also pointed out that the NMF has been designed to be read by optical character recognition programmes. As a result, all of the panels other than the field for the additional terms and conditions must comply with the formatting in the NMF published by the Registrar, including the size and location of the standard terms document number.
All moneys mortgages
Modern mortgages are usually prepared on an all moneys basis rather than as loan contracts. Mortgages regulated by the National Credit Code (NCC) in Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth) are also usually prepared on an all moneys basis; that is, they secure all moneys payable under each regulated loan contract that the parties agree is secured by the mortgage. This allows the mortgage to be used for future debt.
The NCC mortgage requirements for regulated mortgages (NCC Pt 3 Div 1) are unchanged. Among other things they require the mortgagor’s written acceptance of the extension of the mortgage to the future debt, prohibit third party mortgages, and require the mortgage to be “signed by the mortgagor”. In addition, apart from the NCC requirements relating to guarantees, if the mortgage secures money payable under a guarantee, mortgagees should also require a written acknowledgment of the extension of the mortgage to future advances secured by the guarantee.
The mortgage must ultimately secure a debt
Following the Global Financial Crisis a number of cases considered whether the relevant all moneys mortgages actually secured fraudulently created debts. In Sabah Yazgi v Permanent Custodians Limited [2007] NSWCA 240 the court held that despite the mortgage being indefeasible it didn’t secure the debt owed to the financier. This led to a renewed interest in stating the amount of the debt in the mortgage as a means of providing some protection to mortgagees in the event of a fraud.
Mr Yazgi forged his wife’s signature on a mortgage to refinance their home and obtain additional money, then they divorced. The solicitors drafting the mortgage described the debt as a loan owed by the mortgagors jointly but did not state an amount. Unfortunately, that description over-rode the joint and several liability clause in the mortgage covenants.
It meant Mr Yazgi was the debtor and the mortgage did not secure his loan. Other factors intervened causing Mr Yazgi’s share of the house to secure the entire debt, but Ms Yazgi’s interest in their home was only encumbered by her share of the refinanced home loan.
Like the NMF the standard NSW form of mortgage at that time did not provide for the debt secured by the mortgage to be described in the form, it relied on a description of the debt in the mortgage covenants or annexures to the mortgage.
Unlike the position as it stood in NSW in 2008, LTPM [2A-2020] requires the debt or liability secured by the Mortgage to be detailed in the Operative words and Terms and Conditions of this Mortgage panel. The description can be included in a standard terms document, Form 20 Schedule, containing additional terms and conditions, or the additional terms and conditions field.
In Provident Capital Ltd V Printy [2008] NSWCA 131, the court held that the covenant to repay a sum of money in the mortgage allowed that obligation to be sued upon as a separate obligation to the obligation to repay in the forged loan contract. In so doing the Court held the debt remained secured by the mortgage despite the forgery.
Mortgagees should make sure that their mortgage covenants contain a positive statement to the effect that the mortgage secures the secured moneys (howsoever described) and identify the relevant debt. Including a clause like “This mortgage secures repayment of the secured moneys, which include without limitation a loan of $…” in the additional terms and conditions field of the NMF continues to be a good practice if the defined term for the secured moneys used in the mortgage is used in place of “secured moneys” in that phrase. Practitioners should also take care to ensure that a description of the debt or liability is explicit and the debt or liability is not merely implied from the remaining terms in the document.
Avoiding a loss of indefeasibility
Land Titles Act 1994 s11A requires mortgagees to take reasonable steps to verify the identity of a person signing a mortgage as mortgagor. Section 11B contains a similar requirement for transfers of mortgages. The process of doing so is often referred to as a verification of identity (VOI). In essence VOI is about taking steps to confirm the authority and identity of a person to sign a mortgage or transfer of mortgage as a means of reducing the risk of fraud. To paraphrase the LTPM, a mere mechanical process for identifying a person signing the mortgage will not be sufficient. That is the mortgagee is also required by the section to take steps to confirm the person’s authority to sign, for example by checking that the person is the registered proprietor or a director of the mortgagor.
The “Safe Harbour” provisions for mortgages in Land Titles Practice Manual paragraphs 2–2005, 2A-2005 and 60–2000, prescribe in detail when the steps taken in relation to VOI are deemed to be “reasonable steps”. If the mortgagor has an Australian Driver’s License and a Passport, these documents must be used to identify the person during a face-to-face interview. Using a 100 point checklist is no longer sufficient to achieve Safe Harbour.
On that note the Safe Harbour provisions were designed to be consistent with the verification of identity requirements for electronic conveyancing in all States and Territories and those used for paper transactions in NSW, SA, Vic and WA for the identification of mortgagors and among others, transferors of land. The policy is designed to mitigate the risk of fraud.
Solicitors acting for mortgagees should advise their clients about the requirements of the Safe Harbour provisions and seek instructions from their clients accordingly.
Attorneys
Attorneys are in a fiduciary relationship with the donor of the power of attorney and act in the principal’s name. An attorney may sign a mortgage as mortgagor provided that they do so within the scope of the power granted to the attorney. The Power of Attorney Act 1998 restricts the scope of an attorney’s power where the attorney tries to use the power to make a gift or when the attorney has an interest in the transaction. Powers of attorney granted under Interstate Acts may have similar restrictions imposed at law as a consequence of the fiduciary relationship.
Where a mortgage is being signed by an attorney, solicitors for the mortgagee should read the power and consider whether any issues of benefit or conflict transactions rob the attorney of the power to execute the mortgage. They should also check that the power has been registered; the mortgage cannot be lodged before the power is registered and the registration number for the power must be shown in the attestation clause signed by the attorney.
If the attorney has a conflict of interest, the power of attorney needs to expressly authorise the interestedness. The exception is where the attorney exercises the power for a transaction in which the attorney and donor are jointly interested, for example a spouse of an army officer serving overseas signing a joint mortgage for the purchase for their new home as joint tenants as attorney for the officer.
For similar reasons express powers are required for attorneys to execute guarantees (whether or not secured by a mortgage). A particular difficulty faced by a lender in this instance is that the donor of the power, not the attorney, is the appropriate party to receive the legal advice on the guarantee (Angelina Spina v Permanent Custodians Limited [2008] NSWSC 561) if issues of unconscionability are at issue.
Third party mortgages
The NCC and Codes of Practice subscribed to by banks, building societies and credit unions prohibit third party mortgages. Third party mortgages are mortgages that are intended to include debts of a third party via the definition of the secured moneys.
As most of the mainstream lenders are excluded from using third party mortgages these mortgages are uncommon and often poorly understood. Traps for unwary solicitors abound. The application of the Australian Consumer Law to these mortgages increases the risk of a third party mortgage being held to be unfair or unconscionable.
Contemporary precedent mortgages are drafted as first party mortgages, making it easy to make a drafting mistake that results in the mortgage not securing the relevant debt. Particular care needs to be taken to ensure that the description of the debt actually works to secure all liabilities the mortgagee intended the mortgage to secure.
The parties also need to consider the equitable remedies available to third parties to a transaction and whether, as with a guarantee, additional clauses need to be included to deal with them. In Australia in 2018, it is probably safer and easier to avoid a third party mortgage and secure the debt with a guarantee supported by a mortgage. After all, guarantees are relatively common and should be well understood by solicitors.
Summary
If you are not using the National Mortgage Form at present, you should at least be preparing to implement it before Christmas to avoid unnecessary issues relating to the inability to lodge your client’s mortgage because none of the parties executed it on or before 1 March 2018. Although we have a new form of mortgage (the NMF) the old issues relating to the contractual arrangements and capacity to sign a mortgage have not changed and will continue to provide traps for the unwary. The above snapshot only touches on a few of the issues solicitors acting for mortgagees need to consider when preparing or advising on mortgages.
